United to buy Health Net business in Northeast

UnitedHealth Group, the country's largest private health plan by revenue, has announced it intends to buy Health Net's business in three states.

If the July 20 deal is approved by regulators, the health insurance market in New York, New Jersey and Connecticut will be narrowed by a United purchase for the second time in five years. United bought Oxford Healthcare in 2004, expanding its membership in those states by 1.5 million. The Health Net purchase would add up to 578,000 more members.

Under the deal, United would pay Health Net $350 million right away, and as much as $280 million over two years depending on how many Health Net members renew with United.

Health Net's business in the Northeast, along with its Arizona membership, became the target of an internal "strategic review" in 2008. Health Net Chief Executive Officer Jay Gellert earlier this year estimated the company had as much as $500 million tied up in those states that it wanted to "liberate" because the company wasn't getting a good return. Instead, the company wanted to concentrate on California, where it is headquartered, and Oregon.

"United is getting the opportunity to add a number of lives at a very low cost, and we're getting the benefit of the return of capital," Gellert told investment analysts during a conference call about the deal.

American Medical Association President J. James Rohack, MD, a Texas cardiologist, said in a statement that the AMA would review the deal and "work with the Connecticut, New Jersey and New York medical societies to stop or restructure any transaction likely to harm patients and physicians through reduced market competition."

Connecticut State Medical Society President William Handelman, MD, a nephrologist from Torrington, Conn., said with Health Net out of the picture in Connecticut, just three powerful health plans will remain, decreasing physicians' bargaining power in contract negotiations.

"Frankly, I think any further consolidation of the HMO market is a problem in Connecticut," he said.

For the CSMS, the proposed deal carries additional weight because the medical society operates an independent practice association of 7,000 physicians that contracts with Health Net and is essentially the plan's network. Dr. Handelman said he was unsure whether United would keep its own network or switch to Health Net's, or whether a switch would mean a pay cut for those doctors.

Spokeswoman Lynda Adams said the Medical Society of the State of New York did not have any comment on the proposed United deal. When earlier rumors surfaced that New York-based EmblemHealth might be the buyer for Health Net's Northeast business, the medical society urged "close examination" of the deal by state regulators.

The Medical Society of New Jersey did not respond to requests for comment before deadline for this article.

The proposed acquisition could be the first test of antitrust enforcement in the health insurance industry under the Obama administration's Dept. of Justice.

"There's some point in time the Dept. of Justice will draw the line," said David Balto, an attorney and former policy director of the Bureau of Competition of the Federal Trade Commission, now a senior fellow at the Center for American Progress. Balto has worked on behalf of the AMA and testified against mergers before state regulators and Congress.

He said the new administration's Dept. of Justice Antitrust Division has signaled it will be less permissive than the Bush administration.

"There is this gigantic health care reform debate going on, and it's important for the department to demonstrate to the administration that it can play a critical role in making sure markets work," Balto said. "The department clearly is attuned to ramping up health insurance enforcement and is looking for cases to articulate a stronger standard of enforcement."

United already has a sizable piece of the market in New Jersey, according to the most recent market data compiled by the AMA: as of January 2006 United had the second-largest share of New Jersey's health insurance market with 21%, behind Aetna's 32%.

According to the report, neither United or Health Net were among the two largest insurers in any New York markets. Connecticut's market share data were not included in the AMA's study.

In the conference call about the deal, Gellert told investment analysts that he was satisfied the acquisition could pass muster with state and federal regulators.

"We've had some very smart people with both companies look at the regulatory issues," he said.